Budget 2015: ICAS reaction

Main points

Continued call for stability around the freedom and choice reforms for pensions.

The reduction in corporation tax will not benefit all employers.

The ICAS Budget Team assesses the key announcements in the Chancellor's July 2015 Budget statement.

In
today's Budget, the Chancellor has clearly set out the direction of travel of
the UK Government for the next parliament.

Over
the next five years we will see a shift in power and responsibility for public
services and for economic levers from London to the power houses of Northern
England. Along with the devolution of further powers to Scotland, Wales
and Northern Ireland, the agenda appears to be one of de-centralisation.

Another
shift is also clear, with a shrinking state and a government focussed on
economic growth and individual economic activity, there is a clear expectation
that individuals and families must take more responsibility for their own
economic wellbeing.

We
have seen some measures to support this shift with further increases in the
personal allowance, the introduction of the living wage and the extension of
free childcare in England. The Chancellor's hope must be that
economic growth and job creation is sufficiently powerful to support those who
will lose out from the Budget through changes to tax credits and housing
benefit and the freeze in working age benefits.

Not
all fiscal consolidation plans were set out in this Budget and a passing
reference to a review in the autumn, likely heralds a comprehensive spending
review.

Avoidance
measures

Comments by Charlotte Barbour, Director of Taxation

The Chancellor announced that he would continue his attack
on tax avoidance. However, there is a danger that continual emphasis on this
may taint voluntary compliance in the UK, which is high, and tax compliance may
be eroded by constant talk of people avoiding taxes and a failure to crack down
on evasion. We therefore welcome the increased government focus on
criminal evasion.

It remains the case that there should be a more informed
and serious debate about tax compliance and tax avoidance. There is
clearly a need for a new era of better standards of behaviour all round – from
accountants, tax advisors, tax administrations, businesses and
individuals. The law also needs to work properly, with simpler, better
legislation, which enacts a clear tax policy and responsibility for this rests
with the politicians that propose and enact tax law.

Pensions

Comments by Christine
Scott, Assistant Director, Charities & Pensions

ICAS
has previously called for a pensions system that will endure for the long
term. This includes having a system which will encourage retirement saving
throughout a person's working life.

The
publication of the Green Paper "Strengthening the incentive to save: a
consultation on pension tax relief", recognises that further work is needed to
create an enduring system. Auto-enrolment was designed to ensure people
save and now the UK Government is moving to the next stage which is encouraging
people to save enough.

Tax
reliefs are a powerful lever to encourage pension saving but on their own are
unlikely to be sufficient and we will continue to call for stability around the
freedom and choice reforms to encourage providers to develop new pension
products which gain the confidence of the public.

There
has been a shift in responsibility for retirement saving from the employer to
the individual which has taken place over many years: freedom and choice in
pensions completes this transition. With this comes complexity for
individuals and as such it is disappointing to see the introduction of more
complexity through the tapered reduction in the annual allowance for those
earning over £150,000.

Previous
reductions to the annual allowance combined with cuts to the lifetime allowance
could become a disincentive to pension saving for those on more modest incomes
which may act counter to the UK Government's policy on encouraging saving.

Inheritance tax – main residence relief

Comments by Susan Cattell Head of Tax (England &
Wales)

The Chancellor confirmed this measure last week
so it is no surprise to see it included in the Budget. It will doubtless
be welcomed by many in the South East and London whose main asset is the family
home – the value of which now exceeds the current IHT threshold. We are
however concerned that it adds considerable complexity to the IHT rules – it
would have been simpler to increase the threshold.

Complexity- the new IHT relief

Comments by Susan Cattell Head of Tax (England &
Wales)

The new relief from IHT involves a new transferable
main residence allowance of £175,000 per person on top of the normal IHT
threshold of £325,000 – where the main residence is left to children or
grandchildren. This could give some married couples and civil partners a total
IHT threshold of £1 million. The relief will taper away where the value
of the estate is more than £2 million. In order not to deter people from
downsizing the relief will be linked to the sale of the original home.

As with the introduction last year of the
transferable marriage allowance, this is a relatively complex measure, which
will doubtless require pages of legislation because it seeks to offer a
restricted relief. Additional complexity arises from the fact that the £175,000
figure will not be reached until 2020-21.
The allowance will be £100,000 in 2017-18, £125,000 in 2018-19, £150,000
in 2019-20, and finally £175,000 in 2020-21. It will then increase in line with
CPI from 2021-22 onwards. It is aimed specifically at couples with offspring,
which reflects an ongoing move away from single taxation.

Corporation tax

Comments by Charlotte Barbour, Director of Taxation

No doubt business will welcome the proposed cuts to
corporation tax rates
to 19% and then to 18%, although it is interesting to see
this being put forward as a compensatory measure for raising the minimum wage
to a living wage. It is not necessarily the case that the profits a company
generates will equate to the number of people employed and on low wages.

The cut in corporation tax may also be attractive for
those businesses that operate via a corporate vehicle but of course this
announcement increases the differential between the taxation of company profits
and unincorporated business profits, such as partnerships and sole traders.
Differentials can lead to some feeling disenchanted; or it may lead to some
seeking to be within the lower profit regime. There are mixed messages in
relation to tax avoidance – and it is not clear whether tax competition and
reducing tax avoidance are compatible.

Living wage and charities

Comments by Christine
Scott, Assistant Director, Charities & Pensions

The
introduction of a living wage for those aged over 25 was preceded by the
announcement that corporation tax rates would be reduced to 19% and then to
18%. However, it was not until the Chancellor pulled the living wage 'rabbit
out of the hat' that the reason for the corporation tax change becomes
apparent.

However,
the reduction in the rate of corporation tax will not benefit employers who are
not subject to corporation tax such as charities. While charities will
likely welcome the increase in the employment allowance to £3,000, introducing
the living wage will create added cost pressures for the sector.

Reducing
employers NIC would have been a measure to benefit all employers, not just
companies and, on reflection, this may be something which Chancellor wishes he
had considered.

In
a recent survey of ICAS members working in the charity sector, very strong
support for the living wage emerged which is entirely consistent with the value
of the sector. The survey found 55% of those who responded to questions
about the living wage indicated that their charity has adopted it. After
stripping out those charities run purely by volunteers, this equates to 67% of
charities covered by the survey. The key finding, however, was a real
willingness by charities that do not currently pay the living wage to do so
with only 3% of respondents indicating that their charity does not wish to
adopt it.

The
living wage is a clear priority for the charity sector and we would welcome
some further consideration by the UK Government as how charities can be best
supported in this regard.

Personal allowances

Comments by Susan Cattell Head of Tax (England &
Wales)

The Conservative manifesto promised that the
personal allowance would be increased to £12,500 by 2020/21. Today's
announcements of increases to £11,000 in 2016–17 and £11,200 in 2017-18 are steps in that direction.

This is good news for the lower paid as it will
remove them from tax completely. However it may not help the very lowest
paid who no longer pay income tax anyway due to previous increases in the
personal allowance – but still pay NIC because the threshold is different.

Dividends

Comments by Charlotte
Barbour of Taxation

In
practical terms, this is a simplification for most taxpayers with relatively
small amounts of dividend income. It may also encourage investment in
shareholdings. In terms of tax administration, it is a very welcome step with
the forthcoming devolution of income tax. For example, the Scottish Rate of
Income Tax will apply to earned income and, hence, removing small amounts of
unearned income will ease income tax collection. Overall, however, it does
introduce another exception into the tax system and ICAS would prefer a more
holistic review of taxation of income and saving.